The Federal Reserve is a system that is found in United States. It can also be referred to as the central bank of United States. Research shows that this system was started in the year 1913. It is actually partly government and partly privately based. The Federal Reserve has got various functions. One of the major reasons as to why this bank was created is because it had to address any panic amongst banks in United States. The Federal Reserve also has to help in balancing among government’s centralized responsibility and banks’ private interests.
(Epstein, 2003)This includes regulating and supervising the banks in United States. The Fed is also responsible for managing the monetary policy. This is in relation to the supply of money within the nation. All these are carried out to ensure that there is maximum employment, the prices are stable and the interest rates are quite moderate and long term. As illustrated, the Federal Reserve has the responsibility of maintaining and ensuring that there is maximum employment in United States. The Federal Reserve is also at the same time expected to keep inflation low in the nation.
This is a very challenging task that needs skilled labour. One of the tools that the Federal Reserve uses to carry out its responsibilities is maintaining or changing the interest rates. When there are low interest rates in the market, there results in more money circulating among people. This is due to the fact that low interest rates make it very cheap for people to acquire money. This situation can lead to economic development in the nation. This is due to the fact that people tend to spend more when they get more.
This means that as people get more money they will automatically look for something to purchase using that cash. Though this may indicate development, it can also lead to some multiple problems if it is not controlled. One of the possible problems is having a lot of money in circulation and very few goods in the market. This automatically results in inflation. This is due to the fact that businesses can decide to increase the prices because of the cash flow in the market.
This means that even the basic goods increase in prices. The Federal Reserve alters bank rates through increasing or lowering rates of discounts and through influencing rates of federal funds. (Hafer, 2005)Discount rates refer to the rates charged on banks by the Federal Reserve when the banks borrow money on overnight basis. As this rate is increased, banks also increase their rates on borrowing and these results in less people getting loans. This means that there results in less money in the market and therefore commodities decrease in price.
There are also times when Federal Reserve increases the rates charged for banks borrowing from each other. This is known as the funds rate. The results of taking this initiative are more of the same that have been discussed above. Research shows that on thirtieth of January, 2008, the Federal Reserve decided to reduce its fund’s rate by three percent. In fact a week earlier on, there had been a three quarter decrease on the same rates. In December 2007, the Federal Reserve is known to have had a quarter point reductions on the funds rate too.
This means that within a span of six months there has been a five rate decrease. These changes were made after four years where the rates had been maintained. Research shows that these initiatives are not in line with the monetary policy. (Rudolf, 2006)